Magazine

Rethinking Risk: The Ellevest Way

By Sallie Krawcheck

May 9, 2016

Investment “risk.” The word itself makes me feel itchy.

And the “risk tolerance questionnaires” that most investing firms have me fill out — asking how much risk I am comfortable taking on — make me feel itchier still. I remember thinking: How am I supposed to know? Aren’t you the experts?

I’m not alone. In the hours and hours and hours of research we did with women on investing, we’ve heard that concerns about understanding how much risk you should take can be a key issue in keeping you from investing.

So, we’ve turned the risk question inside out.

We don’t just set your ‘risk budget’ and go to the beach.

Forget about how much risk someone thinks they can take. Research shows that we are each poor judges of this; we simply don’t have the personal insight or knowledge. Instead, we asked ourselves the question: What amount of investing risk should we take? What amount of risk can we each afford to take?

The answers differ depending on what you want to do: a near-term goal for which I really, really need the money, I don’t want to take on much — or any — risk at all. Think Emergency Fund. For that, I want to be certain that I’ll have the needed money, so we advise that you put that money 100% in FDIC insured bank deposits (which essentially offers the lowest risk).

For a longer-term goal, I can afford to take on more risk, as a means to potentially earn a higher return. That means I can invest less money today and have it grow over time, because taking on that risk may pay off in return (say I invest $40,000 today and have it grow to $75,000 in twenty years*). If the market declines during that period, I may have the time to make it up.

But how much risk is the right amount for these longer-term goals?

Take on too little risk (such as with an Emergency Fund), and your money doesn’t grow. Take on too much risk and you may earn a higher return over time, but you can also experience more significant market ups and downs. And, you might end up needing your money at an inopportune time in the markets.

Hmmm.

We spent a lot of time analyzing and researching the right balance between risk and returns. The answer we came to: to take on risk in your investment portfolios such that you will achieve your long-term goals — or better — in 70% of market scenarios*.(And it may be “better than that,” but in other scenarios that fall outside of the 70%, you may fall somewhat short.)

Based on the hundreds of hours of research we did with women like you, targeting that 70% probability gives you (and us) enough confidence that we can all sleep at night, but gives you the opportunity to grow your money in a way that is simply not possible at 100% probability.

And we don’t just set your “risk budget” and go the beach: we make sure that the 70% probability stays at 70%.

Because things happen: markets go up, markets go down, you may not make a monthly deposit, time passes. So we employ our proprietary technology to monitor your investment portfolio on a daily basis, to keep it at that 70%; and we adjust it as time passes (and your investing time horizon shortens) into lower-risk portfolios.

And, if need be, we alert you with the actions you can take, such as increase your deposit or move your goal out in time, if you fall off track.

We believe that investing this way increases the chances of your reaching your goals, substantially, as you move from dreaming about something, to articulating your goal, to investing towards it.

Yes, it’s very different from the days of “How much risk do you want to take?”

Disclosure: These numbers assume $40,000 is invested in a low cost diversified portfolio of ETFs comprised of 91% equity and 9% bonds, rebalanced to this allocation each year. The resulting $75,000 is determined using a Monte Carlo simulation—a forward looking, computer-based calculation in which we run portfolios and savings rates through hundreds of different economic scenarios to determine a range of possible outcomes. The results reflect a 70% likelihood of achieving the amount shown or better, and include the impact of Ellevest fees, inflation, and taxes on interest and realized capital gains.

We do this by running market scenarios upon market scenarios to forecast the probability of you reaching your goals, given your unique circumstances.

Money is power.Invest like a woman.

We create personalized investment portfolios based on your finances and a gender-specific salary curve. Get started: Open an account today.